OECD Recommends Tax Reforms For Latvia

by Ulrika Lomas, Tax-News.com, Brussels

26 August 2015

The Organisation for Economic Cooperation and Development said in a recently released report that Latvia should review inefficient elements of its tax regime.

According to the report, Improving public sector efficiency for more inclusive growth in Latvia, there is scope to improve tax efficiency by lowering taxes on labor income and improving tax compliance.

The report said that the composition of taxes in the country is skewed towards the taxation of labor, with the combined revenue from income tax and social security contributions accounting for 53 percent of total revenues (as opposed to 50 percent in the OECD area). It said that high tax rates are regressive and are both a deterrent to labor market
participation and to formal employment, contributing to a large hidden economy. The OECD proposed that the tax burden should be reduced for those on low incomes in particular.

The OECD also urged authorities to simplify business taxation. The time firms spend complying with tax legislation in Latvia has been significantly reduced over the past few years, mainly thanks to the
introduction of an electronic declaration system and a simplified declaration filling process. Nevertheless, the administrative burden on companies remains higher than in the EU on average (193 hours v. 176 hours) and compared with regional peers (81 hours in Estonia v. 175 hours in Lithuania), the OECD said.

The report also said that Latvia should expand the scope of property and environmental taxes. The contribution of property taxes, at 2.6 percent, is around half the OECD average, with revenues from the taxes on land and buildings amounting to only 0.8 percent of gross domestic product (GDP) in 2013. Doubling the residential and land tax rates could increase revenues by EUR100m (USD115m) or 0.4 percent of GDP, it recommended.

The OECD also said that applying environmental taxes more broadly, including by hiking the landfill tax, would help achieve environmental goals and help fund personal income tax cuts for lower earners.

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